Powell Signals Fed’s Rate Cut Path May Slow, Citing Economic Strength and Uncertainty

Federal Reserve Chair Jerome Powell on Wednesday emphasized economic strength as a factor in potentially slowing the pace of interest rate cuts, urging flexibility in the Fed’s strategy ahead of the December meeting.

Powell Highlights Stronger Economy Ahead of Key Fed Meeting

On Wednesday, Jerome Powell, chair of the United States Federal Reserve, stated that the economy is stronger now than it seemed in September, when the central bank started dropping interest rates. This could mean that policymakers are more hesitant about lowering rates much further, Reuters reports

"We can afford to be a little more cautious as we try to find neutral," Powell said at an event hosted by the New York Times.

Prior to the Fed officials' upcoming meeting on December 17–18, which starts on Saturday, his statements will likely be his last. Investors had been preparing for his arrival by betting on the central bank meeting in two weeks to decrease interest rates for a third consecutive meeting.

Fed Officials Divided on Next Rate Cut

Some of Powell's important colleagues have made comments this week that go in that direction; for example, Governor Christopher Waller stated on Monday that he is "leaning toward" a cut at the next meeting, while others refuse to pre-commit to that outcome.

By echoing his last public appearance in mid-November, in which he stated the Fed could "carefully" deliberate over its rate decreases and need not be in a rush, Powell seems to have aligned himself with the more cautious bloc of policymakers in his statements on Wednesday.

Market Expectations Rise for a Quarter-Point Cut

Since then, indicators of inflation and employment, as well as Waller's remarks, have significantly increased market anticipation of a further quarter-point reduction in the benchmark rate, to a range of 4.25% to 4.50%. That remained mostly unchanged following Powell's remarks on Wednesday.

Despite mounting doubts regarding the direction of broader economic policy in the next year, signs that the Fed has not been able to rein in inflation, and a lack of evidence of a predicted decline in the job market, the chair of the Federal Reserve has stressed the importance of the central bank maintaining its options open.

Regional Fed Leaders Keep All Options Open

Two additional Fed officials—the Richmond and St. Louis regional bank heads—maintained that "keep-all-options-open" stance earlier on Wednesday.

"I'm keeping all my options open," stated St. Louis Fed President Alberto Musalem at a Bloomberg monetary policy conference. He added that he will review incoming data before determining if rates need to be lowered again in two weeks.

While President Thomas Barkin of the Richmond Fed expressed optimism about the future of inflation and employment at the CNBC CFO Council, he cautioned against making any hasty judgments until more data is available before the meeting.

Inflation Trends Remain a Key Concern

The PCE price index, which does not include food and energy prices, has been relatively stable between 2.6% and 2.8% since May, which is significantly higher than the central bank's target inflation rate of 2%.

The Federal Reserve has been vocal about its expectation that pricing pressures will eventually relax, especially in the housing market where real-time data shows a slowdown that has not yet been reflected in delayed government statistics. However, the central bank will remain hesitant to drop rates significantly until it sees evidence to the contrary, Investing.com points out.

Mixed Economic Data Keeps Fed Officials Hesitant

Prior to Powell's arrival, a significant business survey revealed a slowdown in the expansive US services sector. Companies are worried that the incoming Trump government will impose new tariffs on imports early in the new year, which might lead to price increases. Also, consumer spending is still at a robust level, as November car sales were the most in over three years.

Fed officials are on high alert and hesitant to provide much in the way of specific future guidance due to the continuous mix of hot and cold data.

Waller Signals Caution Ahead of December Decision

A rate cut was "leaning toward" this month for Waller, but he qualified that by saying that data collected before the meeting could change his mind. In addition to the jobs data this Friday, measurements of consumer and wholesale inflation are coming next week. On the same day that the Fed meeting begins, retail sales for November are due.

The benchmark rate at now "is restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target," Waller told reporters this week. "That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant."